|The directors of Kohinor Textile Mills Ltd wrote in their third quarterly report that “the company maintains its emphasis on selling higher-value, more embellished products in order to increase gross margins”.|
KOHINOOR Textile Mills is one of few companies that have defied the persisting trend of declining sales and profits during the last one year that have been pulling down the textile industry.
The company’s sales in the nine months ending March 31 (9MFY15) grew slightly by 2.75pc to Rs11.7bn from Rs11.4bn, yet its gross profit grew by a hefty 25pc to just above Rs2bn. The gross profit formed 17.28pc of the company’s sales, against the previous year’s 14pc.
Kohinoor Textile Mills Ltd (KTML) was able to spike its pre-tax profits — excluding ‘other income’ of Rs441m (which included Rs306m received by the company as dividend from its subsidiary Maple Leaf Cement) — by 60pc to just above Rs800m.
The increase in the critically-integrated company’s profitability is attributed by stock analysts to cuts in its cost of sales and debt burden, improvement in management and quality of products, reduction in global oil prices and investments in modernisation of its machinery to keep pace with new textile technology.
Kohinoor Textile’s home textiles business performed well, in large part owing to lower raw material costs and the continued GSP Plus status for Pakistan
Meanwhile, an analysis of financials of 73 listed textile companies with minimum market capitalisation of Rs200m for the period shows that their profitability dropped 53pc, mainly because of slow demand from China, revaluation of the rupee earlier this year, energy crisis and squeezing yarn margins.
The profits of the sample companies stood at just Rs9.5bn, according to a report by Topline Securities analyst Mohammad Saeed Tahir. The exclusion of the loss-making concerns from the sample list brings down the decline in profitability to 36pc.
Talking to Dawn from Karachi by phone, Tahir said he expected the profitability of the listed sample companies to have improved slightly for the whole year. “I guess the decline in profitability for the whole year should be in the range of 30-40pc. The major cause of this is the revaluation of the rupee in the beginning of 2015.”
The report said the sales of the sampled companies had gone down 4.5pc to Rs404bn and a major decline was seen in the composite units.
With its spinning, weaving, processing and stitching divisions, KTML has all the makings of a frontrunner in the local textile industry and has been growing (except for a dip in sales a few years ago) and investing consistently.
Its directors said in their report that the company’s timely investment in modernisation of the plant and equipment positively impacted its quality standards, a necessity given the shift in the weaving sector towards high speed air jet looms.
They added that the reduction in the price of furnace oil allowed the company to produce the bulk of its electricity requirement from its furnace oil engines in Rawalpindi, resulting in improved utilisation levels at lower cost.
The report said the spinning operations were affected by the dumping of cheaper Indian yarn and the company’s conversion margins in the weaving business continued to be depressed because of recessionary trends in export markets.
But the management expected the results to improve going forward as 48 newly installed looms are now running at full capacity, leading to an overall reduction in costs.
Meanwhile, the company’s home textiles business performed well, in large part owing to lower raw material costs and the continued GSP Plus status for Pakistan.
“This has helped the company to make further inroads into high-end home textile retailers in Europe. The weakening of the euro is having an adverse effect but the increase in the proportion of higher-value, more quality-conscious customers has somewhat compensated for this. The company maintains its emphasis on selling higher-value, more embellished products in order to increase gross margins,” said the directors.
In their report for the half-year ending December 2014, the directors said KTML intended to focus on less price-sensitive international customers and higher-end retail markets, turning a potential threat into an opportunity for growth. Moreover, the high-end segment would give greater margins.
Arif Habib Securities investment analyst Khurram Shahzad agrees that Pakistan’s textile sector has underperformed owing to unfavourable industry dynamics, energy crisis and a high cost of doing business. But, he says the industry has also failed to improve the quality of its products and move towards value addition — two factors essential to enhance the competitiveness of its exports in the global markets.
Topline’s Tahir agrees and says the textile industry should perform better in the coming months because of improving macroeconomic fundamentals and government incentives announced in the budget and the textile policy.
The manufacturers, nevertheless, are far less optimistic about the future outlook of the industry.
They point out that the textile industry’s competitiveness has hugely eroded during the last two years because of big increases in power and gas prices, delays in the release of sales tax and other refunds, energy shortages and security concerns, as well as a lack of investment in modernisation of plants and equipment over the past 10 years.
They say their rivals from India, China, Bangladesh and other are being supported by their governments and are eating into Pakistan’s share in the export market.
“Our energy costs are highest in the region and our textile exports are burdened by taxes amounting to over 12pc of our sales. Our refunds are delayed for years because the FBR is unable to meet its tax targets, and many exporters are facing a liquidity crunch,” said a Faisalabad-based manufacturer.
“With the government protecting the rupee despite a hefty increase in our cost of doing business, how bright can be the future of this industry be in the given conditions?” He said the industry was pinning its hopes on the incentive package the prime minister had promised during a meeting with the sector’s leadership.
While many will wait for the business environment to improve and the government to come up with the required incentives, companies like KTML are expected to continue to lead the industry into the future.
Published in Dawn, Business & Finance weekly, September 21st, 2015